IPOs: EV Maker Nio Sputters Out of the Gate With Weak Pricing

Bottom line: Nio's shares
are likely to debut flat to down slightly in a lackluster New York
trading debut, capping an IPO process pockmarked by investor
skepticism.

Wall
Street investors will get a taste of a new flavor of Chinese
company very soon, when homegrown electric vehicle maker Nio makes
its trading debut on Wednesday. But based on all the signals so
far, this offering for a company that some have likened to China's
answer to Tesla (Nasdaq: TSLA) could be a major flop. That would be
somewhat appropriate given all of the real Tesla's current woes,
which point to the difficulties of building up a major new car
maker from scratch.

Nio's road
to New York has been pockmarked with negative signposts pretty much
all of the way. The latest of those has media reporting the company
has priced its IPO American depositary shares (ADSs) at the very
bottom of their range, at a price of $6.25 apiece, raising a total
of $1 billion. (English article) That compares with an initial
target of up to $1.8 billion, and I've heard that even that figure
was trimmed back from initial hopes of more like $2 billion.
(English article)

This
particular development continues a trend that has seen investors
give a chilly reception to money-losing Chinese companies in the
last couple of months. Two money-losing drugmakers that listed in
Hong Kong, Asceltis (HKEx: 1672) and BeiGene (HKEx: 6160; Nasdaq:
BGNE), both now trade below their IPO prices. Another money-loser,
e-commerce company Pinduoduo (Nasdaq: PDD) initially charged out of
the gate with a 40 percent gain, but has since then fallen back to
close to its IPO price.

All that
said, let's return to Nio and discuss the prospects for this
neophyte and the challenges it will face. The company lost 5
billion yuan last year, or around $700 million, which was double
its loss from the previous year. That's not all that unusual for
this kind of startup, and especially in an expensive area like
electric car development.

But other
reports are also pointing out that Nio is behind schedule in its
ambitious plans to become one of the nation's leading EV makers.
Again, this isn't that unexpected but isn't extremely encouraging.
Perhaps one of the most worrisome signs, and one that's really not
new, is China's fickle attitude towards new energy car makers in
general.

Changing Policies

On the one
hand, Beijing wants to encourage the development of such clean
energy cars in a bid to create cutting-edge technologies that can
someday be exported and also to clean up the country's air. But on
the other hand, it is also discovering that the generous subsidies
it gives to Nio and many other EV wannabes often end up getting
wasted, and result in the development of second-rate models using
old and immature technology.

The result
is that China is constantly tweaking its new energy vehicle
incentive programs, since such government support is still quite
critical to the success of most companies. It does appear that
Nio's vehicles probably still qualify for Chinese subsidies, at
least for now, or we probably would have heard otherwise. But
there's certainly no guarantee that Beijing won't decide a year or
two from now that Nio's cars aren't cutting-edge enough and slash
them from the list.

Subsidies
aside, there are also all kinds of other complex issues behind such
cutting-edge manufacturing. Nio currently does all of its actual
manufacturing through a third-party partner, but wants to
eventually build its own plant. That would cost quite a pretty
penny for such a small company, whose own market value will only be
$6.4 billion based on the final IPO pricing.

Looking to
other examples, Tesla, as I've already pointed out, is considered
one of the industry's best, and even they are running into trouble
these days. The leader in China, BYD (HKEx: 1211; Shenzhen:
002594), is backed by billionaire investor Warren Buffett, and is
also having difficulty. At the end of the day I don't think anyone
doubts that EVs are the wave of the future and will someday be
quite lucrative for someone who finds the right formula for
success. As to whether Nio will be among that group, I would
probably put the chances at relatively low.